Wealth Management
Active ETFs represent a fraction of the overall market of investable assets, but the future looks very promising given current growth rates. This is evident through the bevy of new active ETF launches which will continue in 2024. Last year, 75% of ETF launches were active. Additionally, according to Cerulli, 95% of ETF issuers have existing plans or are planning to launch active ETFs in the coming year.
Some of these active ETFs will be conversions of active mutual funds, while others will follow a dual-class structure. In terms of why active ETFs are gaining traction, the biggest factor is the tax benefits of the ETF structure. In contrast, many investors in active mutual funds may find themselves with a tax bill if the fund takes profits on winning positions.
Additionally, the fee structure of ETFs is much simpler while it also leads to more transparency for investors. This appeals to many investors who are then able to hedge risk more effectively. Currently, most of the focus on issuers is for transparent, active ETFs with 59% of launches falling in this category. One caveat is that active ETFs have failed to penetrate the institutional market as 80% of assets currently come from retail investors.
Finsum: Active ETFs had a strong year in 2023 and even more launches are planned for 2024. Here are the major factors driving the category’s growth.
Annuity sales are expected to remain strong in the coming year on the heels of another record breaking year of sales in 2023. Whether 2024 sees another record year of sales ultimately depends on the economy and interest rates. Notably, the Life Insurance Marketing and Research Association (LIMRA) sees these favorable economic trends, such as volatility in financial markets and uncertainty about the economy and Fed policy, continuing.
LIMRA notes that rates are likely to continue declining, which could also lead to a surge of sales as buyers may be eager to lock in rates at these levels. If financial markets continue to move higher, demand for products with lower risk like fixed indexed annuities and fixed-rate deferred annuities may decline while demand for registered indexed-linked annuities will climb.
2023 was rare as nearly all categories saw growth. The highest rates in decades propelled sales of fixed annuities, while uncertainty around the economy and monetary policy drove growth for annuities offering downside protection.
If the Fed does start to cut rates as anticipated, LIMRA projects that sales growth will eventually be impacted especially for more rate-sensitive products. In total, it forecasts sales between $311 billion and $331 billion depending on the trajectory of interest rates.
Finsum: Annuity sales are forecast to remain strong in 2024. However, sales could slow when the Fed does actually start cutting rates as this would impact returns.
When it comes to investing for retirement, most think of IRAs and 401(k)s due to the unique tax advantages. However, there is a tradeoff as these accounts tend to be less flexible. According to Christine Benz, Morningstar’s director of personal finance and retirement planning, there are some upsides to investing for retirement in taxable accounts.
These advantages include the ability to save and invest as much money as available, withdraw funds with no penalty or limitations, and no constraints on investment choices. Using taxable accounts for retirement investing is also necessary for ‘super-savers’ who have maxed out contributions to tax-advantaged retirement accounts.
Benz notes that with the right selection of investments, the taxable account can become as tax efficient as an IRA or 401(k). Additionally, it can help with financial goals of a short or intermediate nature like a down payment for a house, a remodeling project, or a vacation home.
She notes that model portfolios are well-suited for tax-efficient investing in taxable accounts. She recommends structuring these model portfolios into 3 components. One is a liquidity basket for short-term spending needs, a high-quality municipal bond fund basket that is geared for withdrawals between 5 to 8 years, and the rest invested in a globally diversified basket of equities.
Finsum: For retirement investing, there is still a place for taxable accounts especially for specific purposes. Here’s how to use model portfolios to achieve these goals.
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Building an effective lead generation strategy is essential for advisors who are serious about growth. According to Angela Osborne, the COO of Bluespring Wealth Partners, advisors should focus on generating referrals from existing clients and working on leads that are already in the pipeline. Failure to do so runs the risk of becoming a ‘melting iceberg’ which is a firm with no growth strategy that loses clients and assets through time and attrition.
She recommends being clear with prospects about the value being offered in addition to what differentiates you from competitors. And this branding should be consistent across all the mediums where you want to share your message. Additionally, the message should resonate with your ideal client.
In terms of optimizing lead generation, she recommends having a digital marketing strategy. Advisors should also refine their messaging to quickly and clearly articulate why clients should choose them over their competitors. Once a lead is acquired, it must be nurtured which takes time in order to build an authentic relationship.
The final step is to actually convert a lead into a client. Many advisors fail at this final step. She recommends identifying who in the company does this well and have them mentor others at the firm.
Finsum: Without an effective lead generation strategy, RIAs are bound to become ‘melting icebergs’ as they lose clients and assets through time and attrition.
Annuity sales hit a new record high in 2023 at $360 billion which exceeded last year’s record of $311 billion. Experts attributed this to a combination of anxiety about stocks and the economy paired with the high interest rates in decades.
Typically, annuity sales spike during periods of economic uncertainty. However, sales had been muted over the last decade due to the prevalence of ultra-low interest rates. This is evidenced by 2008 being the last year that annuity sales exceeded $250 billion prior to 2022.
Currently, the majority of annuity sales are fixed-rate deferred annuities which pay an average of 4.5%. Prior to the Fed’s tightening campaign, this annuity paid 1.5%. In contrast, sales of single premium indexed annuities and deferred indexed annuities were much lower.
These annuities are the simplest as the buyer hands over a lump sum in exchange for an income stream that lasts through their life. They are also the most effective in terms of hedging longevity risk for clients. However, there is a tradeoff in terms of liquidity and being unable to access the money once it’s put into the annuity. In contrast, fixed-rate deferred annuities do have more liquidity and offer higher rates but come with higher costs.
Finsum: Annuity sales hit a new record high in 2023 due to fears of a recession and inflation in addition to high interest rates.
For discerning investors seeking a personalized approach to wealth management, mutual funds are often just the tip of the iceberg of possible solutions. Mutual funds offer professional oversight and a level of diversification, but transparency and flexibility are not typically among their strengths. Enter Separately Managed Accounts (SMAs).
SMAs function like custom portfolios tailored to the account holder's unique risk tolerance, goals, and even ethical considerations. Want to prioritize tech stocks? Avoid fossil fuels? SMA customization lets investors and their advisors call the shots. And forget about waiting until the quarter or year-end to see the securities held by your fund - SMAs' full transparency of underlying investments provides crystal-clear clarity any time of the year.
Of course, with power comes responsibility. SMAs often require deeper engagement in the investment process, but the effort is often worth it for investors who want the added benefits.
While minimum account balances in the past for SMAs may have seemed intimidating, the tides are turning. Advancements in platforms and technology have lowered entry points, making customized wealth management more accessible than ever. For advisors seeking to cater to sophisticated clientele who value tailored solutions, SMAs deserve a closer look.
Finsum: Separately Managed Accounts offer an advantage over mutual funds for investors who desire greater transparency and flexibility in their accounts.